UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11034
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DIGITRAN SYSTEMS, INCORPORATED
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(Exact name of registrant as specified in charter)
DELAWARE 72-0861671
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(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
90 North 100 East, Logan, Utah 84321
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(Address of principal executive offices) Zip code
801-752-9067
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months ( or such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
As of March 19, 1997, the Registrant had 8,282,069 shares of its common
stock, par value $.01, and 2,000,000 shares of it Class B common stock,
$.01 par value, that were outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
Digitran Systems, Incorporated (the "Registrant") files herewith
unaudited condensed balance sheets of the Registrant as of January 31,
1997, and April 30, 1996 ( the Registrant's most recent fiscal year ),
unaudited condensed statements of operations for the three months and
nine months ended January 31, 1997 and 1996, and unaudited condensed
statements of cash flows for the nine months ended January 31, 1997 and
1996, together with unaudited condensed notes thereto. In the opinion
of management of the Registrant, the financial statements reflect all
adjustments, all of which are normal recurring adjustments, necessary to
fairly present the financial condition of the Registrant for the
interim periods presented. The financial statements included in this
report on Form 10-QSB should be read in conjunction with the audited
financial statements of the Registrant and the notes thereto included in
the annual report of the Registrant on Form 10-KSB for the year ended
April 30, 1996.
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
<TABLE>
<CAPTION>
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Audited)
January 31, April 30,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 188,486 $ 71,589
Accounts receivable 392,748 189,432
Inventories 778,619 1,535,613
Prepaid expenses 11,580 1,380
Note receivable, current portion 120,000 120,000
Cost & earnings in excess of
billings 658,131 484,800
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Total Current Assets 2,149,564 2,402,814
PROPERTY AND EQUIPMENT, net 845,198 951,459
SIMULATOR DEVELOPMENT COSTS, net 877,467 1,089,313
NOTE RECEIVABLE 280,000 280,000
RENTAL & DEMO SYSTEMS, net 522,968 260,996
INVESTMENT IN JOINT VENTURE - 47,052
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Total Assets $ 4,675,197 $ 5,031,634
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</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 865,407 $ 677,431
Accrued liabilities 413,733 474,637
Current notes payable 580,424 291,447
Notes payable-current portion 366,495 448,050
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Total Current Liabilities 2,226,059 1,891,565
NOTES PAYABLE, net of current
portion 878,145 633,768
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Total Liabilities $ 3,104,204 $ 2,525,333
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STOCKHOLDERS' EQUITY:
Preferred stock $ 3,717 $ 3,717
Common stock 82,821 82,821
Class B common stock 20,000 20,000
Additional paid in capital 5,984,101 5,984,101
Accumulated deficit (4,519,646) (3,584,338)
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Total Stockholders' Equity 1,570,993 2,506,301
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Total Liabilities and
Stockholders' Equity $ 4,675,197 $ 5,031,634
=========== ===========
</TABLE>
NOTE: The accompanying notes are an integral part of these financial
statements.
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
<TABLE>
<CAPTION>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
January 31, January 31,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET SALES $ 1,497,018 $ 1,377,698 $ 3,076,900 $ 2,874,489
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OPERATING EXPENSES:
Cost of Goods Sold 629,537 707,045 1,866,711 1,461,197
Selling, Marketing and
Customer Support 779,269 577,033 1,912,458 1,467,184
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Total Operating Expenses 1,408,806 1,284,078 3,779,169 2,928,381
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INCOME (LOSS) FROM OPERATIONS 88,212 93,620 (702,269) (53,892)
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OTHER INCOME (EXPENSE):
Interest expense (72,833) (42,147) (185,987) (184,345)
Equity loss from joint venture -0- (99,414) (47,052) (126,723)
------------- ------------- ------------- -------------
Total Other Income (Expense) (72,833) (141,561) (233,039) (311,068)
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INCOME (LOSS) BEFORE INCOME TAXES 15,379 (47,941) (935,308) (364,960)
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CURRENT INCOME TAX
EXPENSE (BENEFIT) - - - -
DEFERRED INCOME TAX
EXPENSE (BENEFIT) - - - -
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NET INCOME (LOSS) $ 15,379 $ (47,941) $ (935,308) $ (364,960)
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INCOME (LOSS) PER COMMON SHARE
PRIMARY $ .00 $ (.01) $ (.09) $ (.04)
FULLY DILUTED $ .00 $ N/A $ N/A $ N/A
</TABLE>
NOTE: The accompanying notes are an integral part of these financial
statements.
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
<TABLE>
<CAPTION>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine
Months Ended
January 31,
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1997 1996
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<S> <C> <C>
Cash Flows (To) From Operating Activities:
Net loss $(935,308) $(364,960)
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Adjustments to reconcile net loss
to net cash used by operating activities:
Amortization and depreciation 729,159 557,616
Loss from joint venture 47,052 126,723
Gain on sale of equipment - (2,366)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (203,316) -
Decrease (increase) in inventory 756,994 317,221
Decrease (increase) in costs & earnings
in excess of billings (173,331) (536,910)
Decrease (increase) in other current assets (10,200) 89,598
Increase (decrease) in current liabilities 127,072 (22,240)
Increase (decrease) in current notes payable 288,977 -
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Total adjustments 1,562,407 529,642
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Net Cash Flow Provided by Operating Activities 627,099 164,682
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Cash Flows From (To) Investing Activities:
Payments for capitalized simulator
development costs (144,126) (186,845)
Purchase of PP&E - net of retirements (17,697) (6,779)
Proceeds from disposal of PP&E - 6,665
Purchase of truck demo unit (501,455) -
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Net Cash Used In Investing Activities (663,278) (186,959)
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Cash Flows from Financing Activities:
Proceeds from long-term obligations 6,000 77,860
Payments on long term obligations (229,173) (158,470)
Proceeds from notes payable and lines of credit 996,019 778,247
Payments for notes payable and lines of credit (619,770) (624,084)
Proceeds from stock issuance - 75,000
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Net Cash Provided by Financing Activities 153,076 148,553
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Net Increase in Cash 116,897 126,276
Cash at Beginning of Period 71,589 18,899
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Cash at End of Period $ 188,486 $ 145,175
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Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 132,218 $ 218,911
Income taxes - -
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Supplemental Schedule of Noncash Investing and
Financing Activities: NONE
</TABLE>
NOTE: The accompanying notes are an integral part of these financial
statements.
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments ) necessary to present fairly
the financial position and results of operations at January 31, 1997 and
for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed unaudited financial statements be read in
conjunction with the financial statements and notes thereon included in
the Company's April 30, 1996 audited financial statements. The results
of operations for the period ended January 31, 1997 are not necessarily
indicative of the operating results for the full year.
The Company's simulator products result in annual sales characterized
historically by large dollar individual sales of relatively low volume
which are project oriented. The longer, variable length lead times
required to complete the product projects, combined with the percentage
completion method of recognizing revenues can lead to dramatically
different results of operations between quarters, and may not be
indicative of annual results. All quarterly information should be
considered in light of the last fiscal year and the current year to date
operations of the Company.
Principles of Consolidation - The unaudited consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Net Income (Loss) per Common Share - The computation of net income
(loss) per share of common stock is based on the weighted average shares
outstanding during the periods presented. Fully diluted loss per share
is not presented because the effect of outstanding options and other
common stock equivalents is antidilutive.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined on the first-in, first-out method.
Depreciation Methods - The cost of property and equipment is depreciated
using the straight-line method over the estimated useful lives of the
related assets. The estimated useful lives range from 3 - 40 years.
Research and Development - The Company expenses software development
costs incurred prior to the establishment of technological feasibility
as research and development costs.
Capitalized Software Costs - The Company capitalizes software
development costs incurred after technological feasibility of the
software product has been established. Amortization of the capitalized
costs is computed on a product by product basis over the estimated
useful lives of the products. Software costs are carried at the net of
unamortized cost or net realizable value. Net realizable value is
reviewed on an annual basis after assessing potential sales of the
product.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
Material commitments and contingencies at January 31, 1997 include
certain shareholder litigation and possible going concern considerations
as discussed below.
Shareholder Litigation
On April 1, 1993, the Securities and Exchange Commission (the
"Commission" or "SEC") issued an order directing that an investigation
be conducted by the Salt Lake City office of the Commission to determine
whether the Company or any of its affiliates or any other person has
engaged in violations of certain Federal laws. On May 21, 1993, the
Commission issued an order suspending trading of the Company's
securities. On December 29, 1994, a complaint against the Company was
filed in U.S. District Court, District of Utah, Northern Division by the
Securities and Exchange Commission. The complaint named, as defendants,
Digitran Systems, Inc., Donald Gallent (a former officer and director)
and James R. Bryan (a former officer). Mr. Gallent is no longer
associated with the Company. Mr. Bryan has resigned as an officer and,
while still an employee of the Company, is not involved in financial
disclosure. The complaint cited violations of Sections 17(a) of the
Securities Act of 1933, as amended, and Sections 10(b), 13(a) and 13(b)
of the Securities Exchange Act of 1934, as amended, and Rules 10b-5,
12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 promulgated thereunder. A
Final Judgment was filed by the Securities and Exchange Commission on
September 25, 1995 in the United States District Court, District of
Utah, Northern Division. Without admitting or denying the allegations
of the complaint except as to the jurisdiction of the court, the Company
has consented to the Judgment. The Judgment permanently restrains and
enjoins the Company from engaging in acts and practices which constitute
and will constitute violations of all applicable rules and regulations
from the securities acts. There was no monetary penalty assessed by the
SEC in this matter.
In May 1994, a consolidated amended complaint was filed for a proposed
Class Action by Gregory McEwen and Larry Parker, on behalf of themselves
and all those similarly situated, in the United States District Court
for the District of Utah, Salt Lake City Division. The action
consolidated two separate actions filed in August 1993 and February
1994, respectively, against Digitran Systems, Inc., Digitran, Inc.,
Donald G. Gallent, Loretta P. Trevers; Chris S. Coray; Harris G. LeRoy,
II; James R. Bryan; and the accounting firm, Grant Thornton. Included
as Plaintiffs was a proposed class consisting of all persons who
purchased securities of Digitran Systems, Incorporated during the period
from March 19, 1992 to May 21, 1993. The Complaint alleged that the
Company published or released false or misleading information relating
to the recognition of income on certain contracts and improperly
capitalized certain simulator development costs. The complaint also
alleged that certain of the defendants engaged in insider trading
activities. The complaint sought the following relief: 1) declaring
the action to be a proper class action; 2) awarding compensatory and
punitive damages, including interest and that such damages be trebled;
3) awarding extraordinary equitable and/or injunctive relief and 4)
awarding costs and expenses, including attorney's fees and other costs.
The court certified the Plaintiff's class, with the exception of the
Utah Securities Act Claim.
In May 1994, Grant Thornton filed a cross-claim against Digitran
Systems, Incorporated, Digitran, Inc., Donald G. Gallent, Loretta P.
Gallent and James R. Bryan. The cross-claim 1) alleged common law fraud
based on activities relating to the April 30, 1992, 1991 and 1990
financial statements and 2) sought contribution under federal securities
laws and the Utah Uniform Securities Act. The cross-claim sought damages
to be established at trial and indemnification with respect to any
judgment that may be entered against Grant Thornton in this action.
In June 1994, the Company filed a cross-claim against Grant Thornton.
The cross-claim alleged breach of contract and negligence for failure of
Grant Thornton to follow generally accepted auditing standards in the
audit of the Company's financial statements. The cross-claim also
sought contribution under federal and state securities laws. The cross-
claim sought damages to be established at trial, indemnification with
respect to any judgment that may be entered against the Company,
contribution and consequential damages.
On October 6, 1995, an intervention was filed by a number of
shareholders who purchased securities during the class period, but who
purportedly excluded themselves from the class. The intervention also
concerned Shareholders of the corporation who had owned stock in the
corporation for a number of years. The alleged violations of securities
laws mirrored those filed by the class plaintiffs. As a result of the
rising costs associated with the litigation, the Company has agreed to a
settlement with the Intervenors which requires issuance of common stock
valued at approximately $134,000, conversion of approximately 86,000
shares of preferred stock to common stock on a three for one basis, and
the assignment of its action against Grant Thornton to the Intervenors
in exchange for the payment of all costs associated with the action and
for dismissal of all claims by the Intervenors against the Company. In
the event that Intervenors are successful in this matter against Grant
Thornton, the Company shall share equally with the Intervenors in the
recovery, less costs and attorney's fees. As of August 12, 1996, the
Intervenors' action was dismissed by the Court against Grant Thornton,
with the exception of the action assigned by the Company against Grant
Thornton, and the actions of all those Intervenors who have identical
claims as those set forth by the class plaintiffs.
Following the conclusion of the Class Action trial against the Company,
its officers and directors, a federal jury awarded the Class Plaintiffs
$11,878,211 against Donald G. Gallent, the Company's former president,
Digitran Systems, Inc. and Digitran, Inc., apportioning this award with
50% liability against Mr. Gallent individually, and 25% against each of
the companies under the Section 10(b) of the Securities Exchange Act and
Rule 10b-5 Claims. The jury also awarded the Class Plaintiffs the sum
of $2,002,306 against each of these three defendants under Section 12(2)
of the Securities Act of 1933. All of the other individual defendants,
including Loretta Trevers, the present Chairman of the Board, James
Bryan, former CFO and present General Manager of the Company, as well as
the former outside directors, Chris Coray and Harris LeRoy, were
exonerated from all of the claims asserted by the Class Plaintiffs.
After considering the jury verdict, the court entered a judgment on
February 14, 1997, dividing the Rule 10B-5 liability among the three
defendants as follows: against Donald G. Gallent, individually, the sum
of $5,939,105.50; against Digitran Systems, Inc., the sum of
$2,969,552.75; and against Digitran, Inc., the sum of $2,969,552.75.
These sums bear interest according to the Judgment at the rate of 5.64%
per annum on and after entry of Judgment. The Court did not alter the
award as to the Section 12(2) claims. The judgment concurred with the
jury's finding exonerating the individual defendants, excluding Donald
G. Gallent. Following the entry of the Judgment, Digitran Systems, Inc.
and Digitran, Inc. Filed a Motion for Judgment Notwithstanding the
Verdict, and for a New Trial. The Class Plaintiffs have likewise filed
similar Motions. These matters remain before the Court and no ruling
has been made. Currently, the Company continues to negotiate with Class
Plaintiffs in an attempt to resolve the judgment and all outstanding
disputes between the parties.
In the normal course of business, there may be various other legal
actions and proceedings pending which seek damages against the Company.
In the opinion of management, the ultimate resolution of these matters
will not have a material adverse impact upon the Company, its business
or property.
Going Concern
The accompanying financial statements have been presented on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company is the defendant in a class action lawsuit in which the Court
entered a judgment on February 14, 1997, leaving the Company with a
potential liability of approximately $7,000,000. Should the Company fail
to prevail in its Motions now pending before the court, or in its
efforts to negotiate a more favorable settlement with Class Counsel, it
may be unable to continue in existence.
The Company has settled with certain shareholders based on an issuance
of the Company's stock and is continuing to attempt to find a similar
equitable settlement with the remaining shareholder litigants which
would be in the best interests of all parties involved.
The Company has been unable to resume trading and has been denied access
to its traditional lines of credit. However, the Company has been able
to obtain short term borrowings and lines of credit with local
government agencies, a financial institution and certain private
individuals, which have been backed by certain Company receivables.
During the last three years, the Company has relied primarily on cash on
hand from new sales and borrowing to fund operations. During 1993 and
1994, the Company committed significant amounts of its cash on hand to
finance the build up of inventories. From late 1993 through December
1994, management was required to spend significant amounts of time and
resources on the critical matters regarding the SEC investigation and
shareholder suit, which are peripheral to operations. Consequently,
management has had difficulty attracting additional management personnel
to assume some of the tasks created, due to the factors noted above and
cash flow constraints. This scarcity of management resources has
resulted in operational results being diminished from those which
otherwise might be anticipated by the Company. The combination of these
factors has resulted in periods of cash liquidity shortfalls which were
funded primarily by the sales of simulators from inventory, the sale of
certain operating assets, the placing of mortgages on real estate which
was previously debt free, and loans from quasi public institutions, and
the forbearance of the Company's vendors in accepting late payments on
outstanding invoices. The Company anticipates that funding for
operations in the following quarters will come from growing sales
proceeds, and/or equity funding.
The Company's continued existence is dependent upon its ability to focus
on operational considerations in order to create the growth in sales
opportunities and to continue bringing to closure the proposals
currently outstanding to potential customers. Management plans to
devote more focus and financial resources on operational considerations.
If management is unable to achieve expected results, or obtain equity
funding, due to sales shortfalls or other unanticipated events, it may
be required to reduce operations, refinance significant assets, or
undertake other actions as may be appropriate.
NOTE 3 - CONFIDENTIALITY AND NON-DISCLOSURES AGREEMENTS
The Company relies on confidentiality and non-disclosure agreements with
its employees and customers, appropriate security measures, and the
encoding of its software in order to protect the proprietary nature of
its technology.
NOTE 4 - CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is with oil companies, port
authorities, training institutions and various other entities, often
outside the United States. Normally, the Company attempts to secure
shipments outside the United States through letters of credit and/or
progress payments in advance of delivery.
In cases for which shipments are made on open accounts, the Company
normally retains title or ownership claims to the equipment shipped by
terms of its contracts or agreements until significant payment has been
secured.
NOTE 5 - CAPITAL STOCK
The Company's capital stock consists of common stock, Class B common
stock, and preferred stock. The common stock provides for a
noncumulative, $.05 per share annual dividend and a $.01 per share
liquidation preference over Class B common. In addition, the Company
must pay the holders of the common stock a dividend per share at least
equal to any dividend paid to the holders of Class B common. Holders of
the common stock are entitled to one-tenth of a vote for each share
held.
Class B common may not receive a dividend until an annual dividend of at
least $.05 is paid on the common stock. Holders of Class B common have
preemptive rights with respect to the Class B common stock and may
convert each share of Class B common into one share of the common stock
at any time. Holders of Class B common are entitled to one vote per
share held.
The Series 1 Class A 8% Cumulative Convertible Preferred Stock has a par
value of $.01 per share. As of October 31, 1996 there were 371,695
shares outstanding. Holders of preferred shares are entitled to
cumulative dividends of 8% per annum on the stated value of the stock,
designated as $7 per share. Holders of Preferred Stock are entitled to
receive cumulative dividends at the annual rate of $.56 per share,
payable semi-annually on September 15 and March 15, beginning September
15, 1992. As part of a settlement with intervenor preferred stock
shareholders 86,155 preferred shares were consented to be converted to
three shares of Common Stock reducing dividends in arrears by $144,740
and the semi-annual dividend payment by $24,123. The Company paid
dividends of $27,362 for September 15, 1992 and $136,682 for March 15,
1993. No dividends have been paid since March 15, 1993 resulting in
dividends in arrears in excess of $750,000 after the conversion referred
to above. The future payment of dividends on the Preferred Stock is
dependent on further settlements and also upon the generation of future
cash flow and profit by the Company sufficient to meet such obligations
and allow the Company to pay such dividends under Delaware and Utah
corporate law. There may be legal restrictions on the payment of
dividends for periods in which losses are incurred and/or the Company
has an accumulated deficit. Dividends are not payable on any other
class of stock ranking junior to the preferred stock until the full
cumulative dividend requirements of the preferred stock have been
satisfied. The preferred stock carries a liquidation preference equal
to its stated value plus any unpaid dividends. Subject to certain
registration requirements, convertibility of any preferred stock issued
may be exercised at the option of the holder thereof at two shares of
common stock for each preferred share converted. Holders of the
preferred stock are entitled to one tenth of a vote for each share of
preferred stock held. The Company may, at its option, redeem at any
time all shares of the preferred stock or some of them on notice to each
holder of preferred stock at a per share price equal to the stated value
($7.00) plus all accrued and unpaid dividends thereon (whether or not
declared) to the date fixed for redemption, subject to certain other
provisions and requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL AND LIQUIDITY
At January 31, 1997, the Registrant had total current assets of
$2,149,564 and total current liabilities of $2,226,059 representing a
negative working capital position. This working capital position is
reflective of Registrant's overall financial struggle.
At January 31, 1997, the level of inventory decreased significantly from
$1,535,613 at April 30, 1996 (end of the previous fiscal year) to
$778,619. Due to pending terms with potential truck customers, the
Registrant determined that the existing finished truck simulation system
should be used as a demonstration unit and/or a rental unit as
customizations are completed for certain truck simulation customers.
The $501,155 cost of the system was reclassified from inventory to a
fixed asset demonstration/rental system. This reclassification may
enable the Registrant to immediately place the rental system at a
customer's facilities while customizations are made for that customer,
possibly helping the Registrant expedite cash inflows. The Registrant
has also placed several finished simulation systems during the past two
quarters, further reducing the level of inventory.
Accounts payable increased from $677,431 at April 30, 1996 to $865,407
at January 31, 1997, a further indication of the Registrant's reliance
on vendors to obtain the necessary credit on which to operate.
The Registrant relied extensively on proceeds from sales and short term
borrowings on sales contracts for operating capital during the first
nine months of fiscal 1997, as it continued to be without access to
traditional lines of credit with the it's bank or capital markets during
that period; however, the Registrant was able to rely on alternative
sources of credit to partially fund operations.
Cost and earnings in excess of billings increased to $658,131 at January
31, 1997 from $484,800 at April 30, 1996. The balance under this
caption reflects the Registrant's sales of systems which require
software customization prior to delivery.
The Registrant currently has no material commitments for capital
expenditures.
The Registrant was able to lease certain office space in its
headquarters building to others at a reasonable return to the
Registrant.
Through the first nine months of the current fiscal year, the Registrant
has remained in a "tight" cash and liquidity position. Management's
intended marketing and sales efforts have been distracted by the on-
going legal matters of the Registrant. (See Part II, Item 1, "Legal
Proceedings".) Management hopes that a final settlement can be reached
with class counsel in the near future, and management can again focus on
the sales and marketing efforts necessary to bring the level of sales
required for profitability. In the interim, the Registrant may be
required to obtain the needed financing that is not provided through
product sales using the alternatives available to it, which alternatives
are usually more expensive.
MANAGEMENT'S PLAN FOR NEAR TERM OPERATIONS
Pursuant to an agreement with Evans and Sutherland, Inc. ("E & S"), a
Utah corporation specializing in simulation and graphics, the Registrant
has begun the creation of the next generation of crane and truck
simulation products based on the E & S "Liberty Series" image generator.
The Registrant anticipates receiving contracts from customers for
upgrades to the new system. The conversion of many of the Registrant's
software modules to the E & S system has already taken place and
additional modules will be converted as requested by specific
customers.
The Registrant hired a new marketing director for the petroleum market.
This market is being aggressively pursued and, hopefully, will be
expanded further through the sales of upgrades for the systems owned by
existing customers, by providing support and maintenance services, in
addition to the sale of new systems. The petroleum simulator has been
upgraded to a Windows-based application and additional upgraded features
are currently in development.
Due to the need for the Registrant to operate in large part from its own
capital resources, it has been forced to adjust its disbursements
relative to marketing and property and equipment purchases. Management
has attempted to prioritize the expenditures and to maximize the
benefits from the expenditures being made. If the current trend
continues into the future, the current low levels of expenditures on
property and equipment may also lead to inefficiencies which would not
otherwise occur.
RESULTS OF OPERATIONS
Three Months Ended-January 31, 1997
The Registrant's revenues from operations for the quarter ended January
31, 1997 were $1,497,018 as compared to $1,377,698 for the quarter ended
January 31, 1996. The increase in sales reflects the commitment by
management to renewed marketing efforts.
Overall operating expenses have increased to $1,408,806 for the three
months ended January 31, 1997 from a total of $1,284,078 for the same
period in 1996. The increase reflects the increased cost of sales and
increasing amortization of intangible costs, along with some increased
legal and professional fees.
Selling, marketing and customer support expenses increased to $779,269
for the quarter ended January 31, 1997 as compared to $577,033 for the
same period in 1996. The increase is attributable to increased
professional fees, and the increased costs of some marketing personnel.
During the quarter ended January 31, 1997, the Registrant recorded
operating income of $88,212 for the three months then ended. With the
inclusion of interest expense, the Registrant had overall net income of
$15,379 for the three months ended January 31,1997, as compared to a net
loss of $(47,941) for the three months ended January 31, 1996.
Nine Months Ended January 31, 1997
Revenues for the nine months ended January 31, 1997 were $3,079,900 an
increase of approximately 7% over the revenues of $2,874,489 recorded
during the first nine months of fiscal 1996. For the most part,
management believes the Registrant to be fortunate to have maintained a
level of sales comparative to the prior year, given the distraction of
key marketing personnel during the two quarters ended January 31, 1997.
Operating expenses for the first nine months of fiscal 1997 have
increased to $3,779,169 from a total of $2,928,381 for the nine months
ended January 31, 1996, an increase of approximately 29%. The major
single component was the increase in amortization and depreciation of
intangibles and fixed assets. Additionally, management has continued its
commitment to using more resources for the selling and marketing
efforts. General and administrative expenses include the increased
legal and professional fees as the legal activity increased during the
period of the class action trial.
The Registrant has a net loss of $935,308 for the nine months ended
January 31, 1997 as compared to a net loss of $364,960 for the nine
months ended January 31, 1996. The level of sales for the first nine
months of fiscal 1997 exceeds the prior year by approximately 7%, and
management is hopeful the trend can be maintained and expanded in the
future as the Registrant attempts to focus on marketing its products
more, as it achieves final resolution to its legal matters. However,
some of the increase in sales was achieved by using pricing discounts to
bring the contract to fruition. Hence, cost of sales increased to
$1,866,711 for the nine months ended January 31, 1997 an approximate
increase of 28% over the similar period in the prior fiscal year. Cost
of Sales as a percentage of revenues increased to approximately 61% for
the nine months ended January 31, 1997 versus being approximately 51%
for the similar period of the nine months ended January 31, 1996.
Due to the somewhat lengthy period of time required between the
generation of a sales lead with a potential customer and the completion
of a contract with that customer, results of efforts taken in the past
few periods will likely start to be realized during the next few
quarters. Management is encouraged by the progress observed in its sales
and marketing efforts.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the conclusion of the Class Action trial against the Company,
its officers and directors, a federal jury awarded the Class Plaintiffs
$11,878,211 against Donald G. Gallent, the Company's former president,
Digitran Systems, Inc. and Digitran, Inc., apportioning this award with
50% liability against Mr. Gallent individually, and 25% against each of
the companies under the Section 10(b) of the Securities Exchange Act and
Rule 10b-5 Claims. The jury also awarded the Class Plaintiffs the sum
of $2,002,306 against each of these three defendants under Section 12(2)
of the Securities Act of 1933. All of the other individual defendants,
including Loretta Trevers, the present Chairman of the Board, James
Bryan, former CFO and present General Manager of the Company, as well as
the former outside directors, Chris Coray and Harris LeRoy, were
exonerated from all of the claims asserted by the Class Plaintiffs.
After considering the jury verdict, the court entered a judgment on
February 14, 1997, dividing the Rule 10B-5 liability among the three
defendants as follows: against Donald G. Gallent, individually, the sum
of $5,939,105.50; against Digitran Systems, Inc., the sum of
$2,969,552.75; and against Digitran, Inc., the sum of $2,969,552.75.
These sums bear interest according to the Judgment at the rate of 5.64%
per annum on and after entry of Judgment. The Court did not alter the
award as to the Section 12(2) claims. The judgment concurred with the
jury's finding exonerating the individual defendants, excluding Donald
G. Gallent. Following the entry of the Judgment, Digitran Systems, Inc.
and Digitran, Inc. Filed a Motion for Judgment Notwithstanding the
Verdict, and for a New Trial. The Class Plaintiffs have likewise filed
similar Motions. These matters remain before the Court and no ruling
has been made. Currently, the Company continues to negotiate with Class
Plaintiffs in an attempt to resolve the judgment and all outstanding
disputes between the parties.
Presently, the Registrant (the parent company only, not the operating
subsidiary) remains in Chapter 11 and is protected under the bankruptcy
laws. Although a judgment from the trial court has been entered in the
shareholder class action, numerous post-judgment motions are expected,
during which time the Registrant continues in its efforts to negotiate
with class counsel for a resolution of the matter in full, and the
ultimate extent of the damages to be paid by the Registrant remains an
unknown.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were put to a vote of shareholders during the quarter ended
January 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None.
Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Digitran Systems, Incorporated
Date: March 21, 1997 By /s/ Kitt R. Finlinson
Kitt R. Finlinson, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF JANUARY 31, 1997, AND STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JANUARY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 188,486
<SECURITIES> 0
<RECEIVABLES> 392,748
<ALLOWANCES> 0
<INVENTORY> 778,619
<CURRENT-ASSETS> 2,149,564
<PP&E> 1,660,222
<DEPRECIATION> 815,024
<TOTAL-ASSETS> 4,675,197
<CURRENT-LIABILITIES> 2,226,059
<BONDS> 0
<COMMON> 102,821
0
3,717
<OTHER-SE> 1,464,455
<TOTAL-LIABILITY-AND-EQUITY> 4,675,197
<SALES> 3,076,900
<TOTAL-REVENUES> 3,076,900
<CGS> 1,866,711
<TOTAL-COSTS> 3,779,169
<OTHER-EXPENSES> 47,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,987
<INCOME-PRETAX> (935,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (935,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (935,308)
<EPS-PRIMARY> (0.09)
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